Personal penalties in competition law: CMA revises its guidance on director disqualification orders

Summary

On 6 February 2019, the Competition and Markets Authority (CMA) issued revised Guidance on Competition Disqualification Orders (CDOs), following a public consultation process between July and September 2018. Its guidance provides an overview of the legal framework for the CMA’s powers to seek CDOs or accept competition disqualification undertakings (CDUs) in lieu, as well as guidance on the CMA’s approach to the exercise of its powers.

Together, the changes made by the CMA are intended to give the CMA greater procedural flexibility and discretion in the exercise of its powers including permitting CDOs to be sought earlier in the process, while at the same time incentivising directors to work closely with the CMA and to offer CDUs early in the process. This is an important change given the CMA’s signal that it intends to use the power more frequently and more widely (beyond cartel cases into abuse of dominance and other infringements). Thus far there have been only three directors disqualified under the relevant provisions – both involving the directors providing undertakings to the CMA rather than the court imposing orders in the 16 years the power has been on the statute books.

Key changes: The revised guidance, which came into effect immediately on 6 February 2019 and replaces the previous guidance (and so applies to all cases currently under investigation by the CMA), includes five key changes to the CMA’s CDO procedure and guidance:

(i) allowing for more flexible decision-making by the CMA by replacing the previous five-step test with a non-exhaustive, principles-based approach;

(ii) streamlining the procedure and trimming evidentiary burdens by removing the automatic right of a director to make oral representations, and stating that access to the file is limited to the index of evidence provided;

(iii) removing the limits on the CMA to apply for a CDO before the expiry of the period in which a company may appeal an infringement decision;

(iv) recognising material assistance and co-operation from directors as mitigating factors that may reduce the period of disqualification; and

(v) taking the early offering of CDUs into account when considering the appropriate length of a CDU disqualification period. 

Background

Since 2003, the CMA has had the power to apply to the Court for a CDO to be made against an individual where (i) a company of which s/he is a director has breached competition law, and (ii) his/her conduct as a director makes him/her unfit to be concerned in the management of a company. The CMA may also seek and accept a CDU from a director in lieu of applying for a CDO. A director can offer to give a CDU at any during an investigation or during court proceedings.

A CDO and CDU have equivalent effect and, in each case, the maximum period of disqualification is 15 years. During the period of disqualification, it is a criminal offence for the individual concerned to be a director of a company, or directly or indirectly take part in the management of a company. In addition, any person involved in the management of a company in contravention of a CDO is personally liable for all of the relevant debts of that company.

The CMA’s guidance on CDOs sets out how it will exercise its powers to investigate and make an application for the disqualification of directors of companies and other entities that have breached competition law. The CMA’s previous guidance was updated in 2011, with the intention of signalling a tougher stance towards assessing an individual director’s responsibility for a company’s competition law infringements.  This guidance - controversially – included the possibility of imposing a CDO where a director did not in fact know of the breach, but the surrounding facts meant that s/he “ought” to have known. The revised guidance builds on those principles, recognising that the CMA has different expectations of directors with different responsibilities and that it will take into account a director’s role in the company, in particular whether the director has an executive or non-executive role, the director’s specific responsibilities within the company for example whether or not the director is part of the audit committee or otherwise responsible for overseeing compliance with law, and the size of the company and wider corporate group.

Nevertheless, the CMA has yet to apply for a CDO and has only disqualified directors using CDUs in two cases so far. The first CDU for a five-year disqualification was accepted by the CMA in December 2016 from Daniel Alston, managing director of Trod Ltd, which the CMA found to have entered into an agreement with GB eye Ltd (trading as GB Posters) that they would not undercut each other’s prices for posters and frames sold on Amazon’s UK website by using an automated re-pricing software (see our previous update here). The second case, in April 2018, involved two directors of a residential estate agents in Somerset that had been fined for infringing the competition rules. The two directors gave the CMA CDUs not to act as directors of any UK company for periods of three years, six months and three years, respectively.

Consultation Process

On 26 July 2018, the CMA launched a seven-week consultation on proposed changes to its CDOs guidance in force at the time. Alongside the consultation document, the CMA published draft revised guidance showing the proposed changes, which were stated to reflect the experience the CMA has gained in exercising its powers, the judicial nature of the director disqualification process and embedding efficient investigation and decision-making practice.1 The CMA indicated that it was motivated by its experience in the two prior CDU cases (discussed above) to update its guidance, and that the changes will allow the CMA to make greater use of its director disqualification powers in the future.

The CMA only received three responses to its consultation, including that of Linklaters LLP (available here). The respondents were all relatively critical of the CMA’s proposals on decision-making, procedure and timing, arguing that they would undermine legal certainty and due process. However, they welcomed the CMA’s recognition of director co-operation and the timing thereof.

The final revised guidance adopted by the CMA remains nearly unchanged from the draft revised guidance issued by the CMA for consultation.

Key changes to the CMA’s guidance

The revised guidance – in force as of 6 February 2019 – builds on the previous guidance and the changes mainly address the procedure for applying for CDOs and accepting CDUs, as well as the CMA’s decision-making process, including in relation to the length of disqualification. We have summarised the key changes and their implications below.

(i) Decision-making. The CMA has replaced its previous five-step analysis with a more flexible, principles-based approach. The revised guidance sets out a non-exhaustive list of factors for the CMA to take into account when making its assessment. This allows the CMA much more flexibility to make a more “in the round” assessment, bearing in mind the facts and circumstances of each individual case and the evidence available. Ultimately, the CMA “retains full discretion when deciding whether to investigate the conduct of a director, to apply for a CDO, or to accept a CDU2.

(ii) Changes to the Section 9C notice. Before making an application for a CDO against an individual, the CMA must issue him/her with a so-called Section 9C notice, which sets out, among other things, the grounds for the proposed CDO application and evidence in support of it. The CMA has streamlined the Section 9C notice to be in line with other director disqualification procedures. The notice will now include a summary of evidence rather than give the director access to all of the evidence in the case. Directors will no longer have access to documents the CMA considers to be non-key. Further, the director will no longer necessarily have a right to make oral representations, but in many cases will have to rely on written submissions alone.

(iii) Timing of applications for a CDO. Prior to its consultation, the CMA removed a provision from its previous guidance in June 2018, which stated that the CMA would not make an application for a CDO whilst an infringement decision or judgment remained subject to appeal (except in circumstances where the outcome of any appeal would not affect liability for the breach, such as where the appeal concerns the financial penalty only). That change was ultimately retained in the revised guidance following the CMA’s consultation. This means that the CMA may pursue a CDO against a director notwithstanding that the underlying infringement decision against the company may then be reversed on appeal. However, it continues to be the case under the revised guidance that the CMA will not apply for a CDO against a director of a company which has benefited from leniency, other than in certain specified circumstances.

(iv) Director co-operation. The CMA has added mitigating factors – of material assistance and co-operation from directors – to the factors to consider in determining the length of a CDO/CDU. This means that the CMA can agree to a reduced period of disqualification in a CDU or recommend the same to the Court making the CDO, in circumstances where a director has been of significant assistance during the CMA’s investigation.

(v) Early resolution. Additionally, the CMA has added guidance that it will take into account at what stage in the investigation a CDU is offered by a director when considering the length of a CDU disqualification period. This is designed to incentivise directors to offer CDUs as early as possible before a final decision is reached. 

Personal liability for directors – a global trend
In a number of countries, there has been a shift in enforcement emphasis towards personal liability for wilful or negligent involvement in breaches of competition law. In Japan and the US, shareholders may seek damages from directors on behalf of the company, alleging that they failed to prevent a breach of competition law or failed to take appropriate steps to address the breach, such as seeking leniency after becoming aware of the violation.
 
For example, in Japan in July 2010, former directors paid 80 million yen to a company to settle allegations that they were negligent in preventing bid-rigging, In the UK, there has been an attempt to recoup payment of a fine through the directors’ and officers’ insurance, although it was unsuccessful.3
 
In the UK, individuals may face unlimited fines, while in Germany, the Federal Cartel Office (FCO) often makes use of its power to impose fines of up to €1 million on directors and other individuals for wilful or negligent breach of the competition rules. In 2018, the FCO imposed fines in cartel proceedings totalling approximately €376 million on 22 companies or trade associations and 20 individuals. Individuals may also be entered into the so-called commercial central register as being “unreliable” business people, which could affect their future employability.
 
Individuals may also be subject to other serious personal consequences, such as imprisonment, extradition, and confiscation and disgorgement orders. In December 2013, a US court imposed a five-year sentence on an executive for his role in a price fixing arrangement, which was the longest imposed for an antitrust violation.4 More recently, two executives pleaded guilty to price-fixing and bid-rigging charges in relation to electrolytic capacitors sold to customers in the US and elsewhere, and each agreed to serve a sentence of one year and one day.5
 
Conclusion and comments

The CMA’s changes to its guidance have added flexibility to the CDO/CDU process which, while resulting in less legal certainty for directors, also provide the CMA with the ability to reward directors for their co-operation. This can be expected to provide greater incentives for individual directors to co-operate with the CMA during competition investigations.

Further, the CMA has indicated that it may match its rhetoric of a strong policy to disqualify directors, which has so far seen limited enforcement practice – despite numerous previous revisions to its guidance. It is likely also that we will see enforcement in cases of abuse of dominance and not just cartel conduct. The CMA, as with other global regulators imposing personal sanctions, for example the US and Australia, considers that individual consequences are much more powerful in terms of deterrence than fines imposed on corporates.

Given this, it is now more important than ever that businesses have comprehensive compliance programmes in place in order to avoid breaches of competition law, with directors being considered as having a key role in developing a culture of compliance.

1.Revised guidance on competition disqualification orders: Consultation document, paragraph 1.3.
2.Paragraph 4.9 of the revised guidance.
3.Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472
4.US v Frank Peake, 3:11-cr-00512, US Dist Ct, DPR
5.US v Satoshi Okubo, CR-17-74-JD-1 ; US v Elna Co. Ltd., 4:16-cr-00365-JD